The mortgage margin is a critical component of your complete mortgage package, particularly if you have an adjustable rate mortgage (ARM). If you are thinking about taking on an adjustable rate mortgage, it is essential to understand how your lender will adjust your repayments over the course of the loan, which index it is linked to and what the lender's margin is.
The mortgage margin is the extra fixed amount of interest that your mortgage lender adds to your ARM's index value to determine the mortgage's interest rate. It is an additional charge that serves as fee for providing the mortgage. Basically, the mortgage margin is the profit that your mortgage lender makes over the index on your adjustable rate mortgage.
The mortgage margin determines the cost of your mortgage loan--the higher the mortgage margin, the greater the cost to you. However, it is a set percentage that typically remains constant over the life of the mortgage loan. While the interest rate will adjust higher or lower over the life of the loan, the mortgage margin mark up on the index remains the same.
The mortgage margin determines the speed with which your lender will adjust your mortgage repayments. All ARMs have pre-determined adjustment periods that establish when and how often your repayments will change. There's an initial mortgage period during which the interest rate remains the same. Following this period, the interest rate will adjust periodically based on the index and the margin.
The FICO credit score is used as a measure of credit worthiness. This little understood, frequently changing symbolic number directly affects the mortgage margin that will be charged on an ARM--the higher your FICO score, the lower the mortgage margin. This is because a higher FICO score represents a lower-risk mortgage loan, while a low FICO represents a higher risk or probability that the mortgage payments may end up in foreclosure.
Do not be afraid to negotiate all aspects of your home loan, particularly your lenders mortgage margin. Since this margin directly determines their profit, it is not surprising that they will be reluctant to lower it. Keep in mind that it is not set in stone; lenders will typically charge as high a margin as they can get away with, but they can often adjust it lower. The higher your FICO score, the stronger your bargaining power.
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- Corporate Finance Institute. "Maintenance Margin." Accessed Aug. 15, 2020.
- Charles Schwab. "Margin: How Does It Work?" Accessed Aug. 15, 2020.
- Merrill, Bank of America. "Investing in the margins." Accessed Aug. 15, 2020.
- Corporate Finance Institute. "Gross Margin Ratio." Accessed Aug. 15, 2020.
- U.S. Department of Housing and Urban Development. "Adjustable Rate Mortgages (ARM)." Accessed Aug. 15, 2020.
- Consumer Financial Protection Bureau. "For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?" Accessed Aug. 15, 2020.